#15: Sunk Cost Fallacy

We fall victim to the Sunk Cost Fallacy when we continue with an often failing course of action because of the time, money and/or effort that we’ve already invested in it. When it would be more rational to abandon it, to ‘write off’ our expended time, effort and expense as a ‘sunk cost’.

Essentially, what has been spent is lost already. We should be working to maximise future gains and enjoyment, but that’s just not the way that our minds work. We focus on the past cost rather than future utility.

The sunk cost fallacy pervades many aspects of our day-to-day lives from our relationships to our business ventures, our homes to our everyday activities. It’s why we stay together even though we’ve fallen out of love. Why we pour more money into investments or business decisions that increasingly fail to ‘make cents’. It’s why we go to concerts or events that we’ve lost interest in, when we’re feeling ill or could better use our time otherwise, because we’ve already got the tickets. It’s why we over-eat in restaurants because we’ve over-ordered and should ‘get our money’s worth’. It’s why we sit through truly terrible films because, well, we’ve already started, and why we keep clothes in our wardrobe that we’ve never worn.

Our tendency to honour sunk costs is, in part, due to our inherent loss aversion. As we have evolved the importance of avoiding immediate threats and losses has proven much more pivotal and beneficial to our survival than the ability to maximise opportunities and gains. As such we are far more sensitive to losses of any kind than opportunities for betterment and growth. Essentially, when mentally weighing up losses and gains – and particularly without our active, critical involvement – we don’t value them equally.

Hal Arkes and Catherine Blumer showed the effects of sunk costs on poor decision-making in our everyday lives in a relatable study. They told participants to imagine that they had spent $100 for a ticket on a ski trip in Michigan. Soon after they saw a better ski trip for $50 on offer in Wisconsin and bought that too. After finding out the dates overlapped, they had to choose which to go to. More than half of the participants opted for the $100 ‘good’ experience instead of the $50 ‘great’ experience. While they knew they weren’t going to have as much fun, the loss of $100 loomed larger.

Another pivotal reason is the power of cognitive dissonance. We like to (at least think and act like we) have a coherent and consistent sense of self. Cognitive dissonance is defined as the stress that we experience when we simultaneously hold two or more contradictory beliefs, or when performing an action goes against what we take to be our pre-existing beliefs, ideas and values. Whether investments, business decisions, relationships or even meals and concerts with friends we have made a public commitment as someone who believes in and identifies with ‘that’, as someone who has made a ‘good’ decision. To write off a sunk cost and abandon this line of thought and action – to admit that we’ve made a bad decision - would mean that we’re inconsistent with our past self, that we don’t know ourselves as well as we think or say that we do.

Governments frequently fall victim to it too. The sunk cost fallacy is often colloquially called the Concorde fallacy, taking its name from the exorbitantly expensive and ultimately doomed Concorde jet program. Having spent over 6 billion pounds, and fully aware of its lack of commercial viability, the British and French governments persisted with the Concorde program pouring more and more of their taxpayers money into an entirely questionable venture. Why?

Well, because 6 billion pounds is an incredibly large sunk cost to just write off, and shifting direction can often feel like an admission of failure, one that we don’t like to make even to ourselves. Lyndon B Johnson is famously known to have deployed tens of thousands of US ground troops to Vietnam after he had already decided that the cause was hopeless and the US would never win.

Next time you find yourself at a crossroads and tasked with a difficult decision, ask yourself this… what benefit does it hold for me in the future? If the answer is ‘pride’ you’re likely looking at a classic case of the sunk cost fallacy. Remember, what is done is done, what is gone is gone... all that really matters is future utility.